Key takeaways:
- Closing costs include lender fees and third-party fees for services related to your home purchase.
- A no-closing-cost mortgage provides a closing credit for lender fees in exchange for a higher interest rate, or an increased loan amount to finance the cost.
- You’ll have higher mortgage payments with a no-closing cost mortgage, and you’ll pay more interest over time.
A November 2024 report from Clever Real Estate revealed that buyers spend an average of $4,754 on closing costs. While most buyers expected to pay closing costs, the final amount surprised nearly half (45%) of those surveyed. Although a no-closing-cost mortgage doesn’t eliminate these costs entirely, it does structure your loan in a way that makes the fees easier to pay.
What is a no-closing-cost mortgage?
A standard mortgage loan has a long list of closing costs you pay when you finalize the sale of your home. You’ll see the total listed on your closing disclosure, along with an itemized breakdown. One section of that breakdown is for loan costs, including origination charges.
A no-closing-cost mortgage is a home loan that relieves borrowers of having to pay those origination charges in cash, at closing.
“However, there are other fees associated with your loan, which include third-party fees like appraisal, title insurance, and credit reports,” says Reed Letson, owner of Elevation Mortgage in Colorado Springs, Colorado. You’ll still have to pay those fees at closing.
“You will need to also budget for prepaid fees like property taxes and homeowners insurance,” Letson says.
How do no-closing-cost mortgages work?
“There is no such thing as a no-cost mortgage,” Letson says. Either you pay the fees at closing, roll them into your mortgage loan, or pay a higher interest rate.
Rolling closing costs into your loan
Rolling closing costs into your loan means adding them to the amount you’re borrowing. The rolled-over fees become part of the total amount borrowed, subject to standard lending limits.
For example:
If you need $300,000 to pay for the home and your loan origination fees total $4,000, you’ll need to borrow $304,000 — and be approved for that amount.
Zero-closing-cost mortgage in return for higher rate
Rather than roll the closing costs into your loan, you can pay them via an increased rate on your mortgage in exchange for lender credits toward your origination fees.
“Based on current market conditions, lenders typically add 0.25% to 0.75% to the interest rate to offset closing costs,” Letson notes. “For example, if the standard rate is 6.50%, a no-closing-cost option might be 7%. On a $300,000 loan, this could mean an extra $90 to $150 in monthly payments.”
What are the pros and cons of no-closing-cost mortgages?
A mortgage with no closing costs sounds enticing, and it could be a good thing for the right buyer. But it’s not always the best choice.
Pros
- Fewer closing costs mean you can buy a home sooner than if you had to save more cash.
- Reduced costs due at closing might free up cash you can use for other things, such as a larger down payment, or an emergency fund for unexpected home repairs.
Cons
- Adding closing costs doesn’t increase the amount you’re approved to borrow. “Just last week, I worked with a client who rolled $8,000 in closing costs into their loan, but we had to ensure the total still met their DTI requirements,” Letson explains.
- If the rolled-over amount reduces your conventional loan-to-value ratio below 80%, you might have to pay private mortgage insurance.
- Accepting a higher rate in exchange for a no-closing-fee mortgage increases the cost of your loan.
Who should consider a no-closing-cost mortgage?
A no-closing-cost mortgage loan could be a good choice if you’re short on cash but don’t want to put off your home purchase. If you’re currently paying high rent, trading those payments for equity-building mortgage payments could offset the additional expenses of a no-closing-cost mortgage.
Borrowers who plan to sell their new homes within a few years also might benefit from no-closing-cost mortgages. You could reserve the cash for renovations, for example, and sell before you’ve paid too much of that extra interest. You can also pocket the cash and sell before you’ve paid more interest than you saved. Just keep in mind that you pay more interest in the early years of the loan, when your balance is highest.
Alternatives to a no-closing-cost mortgage
Letson noted alternative ways to pay closing costs if you don’t have enough cash but don’t want to borrow more or pay a higher rate.
- Seller concessions: The first strategy is to ask for seller concessions, which means you ask the seller to pay some of your closing costs. But there’s a caveat: “While this is a great option, just keep in mind in a seller’s market, this may not make your offer very attractive,” Letson says.
- Gift funds: Another option is to use gift funds from family members. “The rules around gift funds are very strict, so it can’t be considered a loan,” Letson says. “The donor will have to sign a letter of explanation stating the funds don’t have to be repaid.”
- Split coverage: The final possibility is a compromise called split coverage. “Instead of having the full amount of closing costs covered by the lender rate, have some cash to cover some of the closing costs, and then use a smaller amount of lender credits,” Letson adds.
How to find and compare no-closing-cost mortgage lenders
Considering the extra long-term costs you’ll incur by not paying origination fees upfront, it makes sense to shop around to compare no-closing-cost lenders and the rates they offer.
A good first step is to use a mortgage comparison platform that can gather personalized rate quotes from a few different lenders, along with estimates of each lender’s origination fees.
Letson recommends using that information to analyze whether it makes sense to pay the fees for the sake of a lower rate. Your analysis should take the monthly payments into account because they determine whether or not you can afford the payments.
Tip:
You can contact the lenders and ask them to itemize their fees, which you can use as leverage with other lenders. “You will be surprised how some of those lender fees will magically disappear,” Letson says.
No-closing-cost mortgage FAQ
What fees are typically included in closing costs?
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Can I negotiate closing costs with my lender?
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Are no-closing-cost mortgages available for refinancing?
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How does a higher interest rate affect my monthly payments?
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Is a no-closing-cost mortgage the same as a zero-down-payment mortgage?
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